The effects of Coronavirus (COVID-19) are being felt by the manufacturing sector both in the south of England and across the UK. As the Chinese Government continues to seek to manage the situation in its own country, the ramifications are being felt around the world, as has been widely reported.
Disruption to supply chains
Businesses are now facing significant disruption to their supply chains as so many component parts are manufactured and shipped to the UK for use in the production of products in many sectors.
The Chairman of a domestic appliance manufacturer based in the south of England has been advised that production of key elements for his company’s products is likely to be delayed for weeks as the factories in which they are made are currently closed.
Shipping from Chinese ports is similarly disrupted, as travel to and from the ports is more restricted as the authorities in China seek to get on top of the virus. The availability of flights is reducing with the consequential hike in the price of airfreight as importers in other countries seek desperately to find other means to maintain the continuity of supply for key parts to their manufacturing process.
Wuhan, at the centre of the virus, plays a vital role in the manufacture of automotive parts. A number of motor manufacturers, including Fiat, Hyundai and Toyota, have already been experiencing supply issues. Others will undoubtedly follow. Germany, whose economy is heavily dependent on the strength of its motor industry, will be closely monitoring developments.
Managing and limiting risks
If you are a manufacturer or company that uses Chinese factories in your supply chain, you can and indeed should take the following practical steps to manage and limit the risks:
- Secure clarity of the position either directly from the Chinese manufacturer or from a reliable source as to the continuity of supply from the Chinese factory – both in the short and longer term.
- Manage your customers’ expectations; explain the position and clarify the supply of stock. In circumstances such as this, being open and transparent is frequently the best policy. If an unexpected break in supply occurs, that is when commercial relationships and trust come under strain.
- Review your supply and sales contracts. Is there a force majeure provision? What does it say? A force majeure contract cannot be implied into a contract in English law. A clause may make specific reference to disease, epidemic or quarantine. If not, such wording as “Acts of God,” Acts of Government “or “circumstances beyond the parties’ control”, may cover the position.If a force majeure provision in a contract is to have effect, then the force majeure event must be the only cause of the party not being able to meet its contractual obligation and being relieved of it. Do remember that a party seeking to invoke a force majeure clause will need to show that it has taken all reasonable steps to overcome or mitigate the effects of the force majeure event. Expert advice is strongly recommended as to the interpretation and effect of such provisions.
- The contract may refer to exclusivity of supply. Are you entitled to seek supply of parts from other sources and in what circumstances? Consider looking to other suppliers for parts which are produced in China to limit your risk of not having the parts you need to make the final product. What are the requirements in terms of time for delivery of such to your company and your supply of product to your customer? What do the contractual terms say as to the consequences of delay – and who bears the responsibility for any delay?
- Look at your insurance policies. Check whether you have business interruption insurance and whether it will cover the disruption caused by the virus. Ensure that you understand the extent of any cover and the time requirements for notifying a potential claim to your insurer. Delay in informing your insurers will generally lead them to refuse the claim. The wording of business interruption clauses is rarely clear cut and is often open for argument. If this is the case, it’s worth investing in professional advice to assist in the presentation of one’s claim to your insurers, particularly when large sums or the future of the business is at stake.
If you would like to speak to someone about this issue please email Peter Taylor.
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